On April 17, 2018 the United States Supreme Court will hear oral arguments in the case of South Dakota v. Wayfair, Inc. The issue is whether the Supreme Court should overrule its previous opinion in Quill Corp. v. North Dakota (“Quill”) that upheld the physical presence nexus requirement for sales and use tax.
The general consensus among sales tax experts is that the Court accepted the case for the purpose of overturning the physical presence standard. Assuming that the conventional wisdom is correct and the Court overturns the physical presence requirement - what will a post-Quill world look like? Will the Court merely do away with the physical presence standard? Will they replace it with an economic standard? Will they remove the physical presence standard only for those states that have met the simplification standards of the Streamlined Sales Tax Agreement, like South Dakota? Maybe a combination of different standards or could it be something else entirely?
The expulsion of the physical presence standard should not have a significant impact on large remote retailers, since many of them are already registered and collecting in most states. Smaller remote retailers will feel a much bigger impact, but, even small retailers have some experience with the collection and remittance of sales tax and, in time, should be able to adjust to a post-Quill world.
Service providers may have a much more difficult time. Since most states tax only a limited number of services, many service providers have limited or no experience with collecting and remitting sales tax. Although the majority of states tax only a limited number of services, the number and type of services that are subject to tax can vary significantly by state. Furthermore, states are continuously broadening their tax base by taxing additional services through legislation. Some states such as South Dakota, Hawaii, New Mexico and West Virginia tax most services. Service providers should also understand that some states tax certain services on the basis of where the benefit of their service is received, not where the service is performed. That can make it difficult to determine which state’s tax is applicable.
If physical presence is no longer required for sales tax nexus, a service provider may find themselves responsible for sales tax in a number of states even though their home state might not tax the service they provide. Furthermore, a service provider might be performing services that are taxable in a specific state and not realize it because the taxable service is essentially imbedded into another service. For example, an advertising agency with clients in various states might be gathering and manipulating data they receive from clients or processing other types of information which they use to target potential customers for their clients. Depending upon the jurisdictional statutes at issue, the advertising agency might be performing taxable data processing and information services in addition to advertising services, which may or may not be taxable. As a result, service providers should not assume their services are exempt if they are not specifically identified as taxable. Providers must be aware of the various service components that make up their primary service and whether or not those component services such as those referenced in the example above, are subject to tax in a particular state.
In addition, service providers who provide a mix of taxable and non-taxable services must understand that the manner in which they invoice their clients can impact how the sales tax is to be charged. As a general rule, when a service provider is providing both taxable and non-taxable services, those services should be listed separately on the invoice. If they are bundled together for a single fee, the entire fee, including the non-taxable portion might be subject to sales tax.
Service providers in a post-Quill world will have to learn quickly how their business may be impacted by the United States Supreme Court’s opinion in South Dakota v. Wayfair. Much will depend upon the details in the opinion and what type of nexus standard, if any that the Court establishes. Regardless of what those details and standards are, service providers should consult with their state tax professional to better understand the impact on their business.